By :Charles Ambrose

Secondary Markets

Overview2

Meaning Functions Structure Players in the Stock Market Merits and Demerits of Stock Market Reforms in Stock market OTCEI & NSE- Origin , Functions, Merits and

Demerits Trading and Settlement System of Stock

Exchange Transactions

Process of Control over Stock exchange3

I. Recognition of SEII. Listing of SecuritiesIII. Registration of stock brokers

1.Recognition of Stock Exchange

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As per the Securities Contracts Regulations Act 1956, a Stock Exchange is Defined as follows:

“It is an association, organization or body of individuals whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.”In other words,Stock exchanges constitute a market where securities issued by the central and state governments, public bodies and joint stock companies are traded.

Functions or Services of Stock Exchanges

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Liquidity and Marketability of

Securities

Safety of Funds

Functions or Services of Stock Exchanges

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Supply of Long term Funds

Flow of Capital to Profitable Ventures

Motivation for Improved Performance

Functions or Services of Stock Exchanges

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Promotion of Investment

Reflection of Business

Cycle

Functions or Services of Stock Exchanges

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Marketing of New Issues

Miscellaneous Services

SEs in India - Structure National level stock

exchanges

Bombay Stock Exchange(BSE) National Stock Exchange of

India (NSE)

List of Regional Stock Exchanges in India

Ahmedabad Stock Exchange Bangalore Stock Exchange Bhubaneshwar

Stock Exchange Calcutta Stock Exchange Cochin Stock Exchange Coimbatore Stock Exchange

Delhi Stock Exchange Guwahati Stock Exchange Hyderabad Stock Exchange Jaipur Stock Exchange Ludhiana Stock Exchange Madhya Pradesh Stock Excha

nge Madras Stock Exchange Magadh Stock Exchange Mangalore Stock Exchange Meerut Stock Exchange OTC Exchange Of India Pune Stock Exchange Saurashtra

Kutch Stock Exchange Uttar Pradesh Stock Exchange Vadodara Stock Exchange

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Stock

Exchanges

in India

2. Listing of Securities11

Listing means admission of securities of an issuer to trading privileges on a stock exchange through a formal agreement. The prime objective of admission to dealings on the Exchange is to provide liquidity and marketability to securities, as also to provide a mechanism for effective management of trading.

Listing of Securities12

Meaning – admission of securities for trading in a recognized SE

Categories: Group A shares (Specified shares or

cleared securities) Group B shares (non- specified shares or

non-cleared securities) Group C Shares ( Odd lots and permitted

securities)

Listing of Securities

Advantages Facilitates buying and

selling of securities Ensures liquidity Offers wide publicity Assures finance Enables borrowing Protects investors

Disadvantages Leads to speculation Degrades Company’s

Reputation Discloses vital

information to competitors

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Listing Criteria14

As per SEBI directive, an unlisted company may make an initial public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at a later date, only if it meets all the following conditions: (a) The company should have net tangible assets of at

least Rs. 3 crore in each of the preceding 3 full years (of 12 months each), of which not more than 50% is held in monetary assets;

(b) The company should have a track record of distributable profits in terms of section 205 of the Companies Act, 1956, for at least three (3) out of immediately preceding five (5) years;

Listing Criteria15

(c) The company should have a net worth of at least Rs. 1 crore in each of the preceding 3 full years (of 12 months each);

(d) In case the company has changed its name within the last one year, at least 50% of the revenue for the preceding 1 full year is earned by the company from the activity suggested by the new name; and

(e) The aggregate of the proposed issue and all previous issues made in the same financial year in terms of size (i.e. offer through offer document + firm allotment + promoters’ contribution through the offer document), does not exceed five (5) times its pre-issue networth as per the audited balance sheet of the last financial year.

Why should one trade on a recognized stock exchange only for buying/selling shares?

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An investor does not get any protection if he trades outside a stock exchange. Trading at the exchange offers investors the best prices prevailing at the time in the market, lack of any counter-party risk which is assumed by the clearing corporation, access to investor grievance and redressal mechanism of stock exchanges, protection up to a prescribed limit, from the Investor Protection Fund etc

What is Demutualization of stock exchanges?

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Demutualization refers to the legal structure of an exchange whereby the ownership, the management and the trading rights at the exchange are segregated from one another.

How is a demutualized exchange different from a mutual exchange?

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In a mutual exchange, the three functions of ownership, management and trading are concentrated into a single Group. Here, the broker members of the exchange are both the owners and the traders on the exchange and they further manage the exchange as well. This at times can lead to conflicts of interest in decision making. A demutualized exchange, on the other hand, has all these three functions clearly segregated, i.e. the ownership, management and trading are in separate hands.

Registration of Brokers19

Meaning – A broker is a commission agent who transacts business in securities on behalf of his clients who are non-members of a SE

Qualifications: Indian citizen – 21 years of age Not be bankrupt or compounded by creditors Not be convicted for any offence, fraud, etc Not be engaged in any other business Not be a defaulter of a SE Education – 12th Std

Functions of Brokers

Client Registration Obtaining margin

money Execution of orders Supply of necessary

slips Issue of contract note Particulars in contract

note

Payment /delivery of securities

Charging brokerage and other charges

Maintenance of bank accounts

Receipt of interest, dividends, etc

Settlement of disputes

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The maximum brokerage that can be charged by a broker from his clients as commission cannot be more than 2.5% of the value mentioned in the respective purchase or sale note.

One can confirm it by verifying the registration certificate issued by SEBI. A broker's registration number begins with the letters ‘INB’ and that of a sub broker with the letters ‘INS’.

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What is the maximum brokerage that a broker can charge?

How to know if the broker or sub broker is registered?

Kinds of brokers22 • A jobber is a Professional independent broker who

deals in securities on his own behalf. His main job is to earn a margin of profit due to price variations. He buys securities as a owner, keeps them for a very short period and sells them for profit known as the “jobber’s turn”

• Does not work on commission basis, but works for profit

Jobbers

• He acts both as a broker as well as a jobber.• The drawback of this system is that he can

act against the interest of investors.

Tarawaniwalas

• He buys and sells securities on behalf of his clients for a commission.

• He does not purchase or sell in his own name.

Commission Brokers

• Sub broker is an agent of a Broker, he helps the clients to buy and sell securities only through the stock broker.Sub Broker

• An authorized clerk is one who is appointed by a stock broker to assist him in the business of securities Trading. A broker cannot be present always on the trading floor of a SE, and therefore requires an assistance of a Authorized clerks. Each broker can employ only a specified number of authorized clerks as per SE rules.

Authorized Clerks

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Difference Between Investor & Speculator

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Kinds of Speculators25

Bulls Bears Stags

Wolves Lame ducks

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• A Bull also called as Tejiwala is an operator who is hopeful of price rise in the near future. In anticipation of price rise he makes purchases of shares and other securities with the intention of selling them at higher prices in future

Bulls• A bear or a Mandiwala on the other hand is a

speculator who is expecting a fall in prices and hence sells securities so that he may buy them at cheap price in future. A bear does not have securities at present but sells them at higher prices in anticipation that he will supply them business purchasing at lower prices in the future

Bears

• A stag is that type of speculator who treads his path very carefully. He applies for shares in new companies and expects to sell them at a premium if he gets an allotment. He selects those companies whose shares are most in demand and are likely to carry a premium.

Stags

• A Lame Duck is nothing but a stressed bear. When a bear finds it difficult to complete his promise he is labeled as a lame duck.

Lame Duck

• These are brokers who are fast speculators, they are very quick to perceive changes in the trends of the market and trade fast to make quick bucks. They are generally not caught in the wrong foot.

Wolves

Trading vs SpeculationKinds of speculators

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1. Client brokers2. Floor brokers3. Jobbers/taravaniwallas4. Badla financiers/badliwalas5. Arbitrageurs6. Bulls/tejiwallas7. Bears/mandiwallas8. Other speculators

i. Stagsii. Wolvesiii. Lame ducks

Speculative transactions28

Option dealingOption contract gives the option holder

the right and not the obligation to buy or sell securities at a predetermined price on or before the specified date in future.

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Wash SalesA device through which a speculator reaps

huge profits by creating a misleading picture in the market.

In other words, it is a kind of fictitious transaction in which a speculator sells a security and then buys the same at a higher price through another broker.

Speculative transactions

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Arbitrageit is undertaken to make profit out of the

differences in prices of security in two different markets

CorneringProcess of holding the entire supply of a

particular security by an individual or a group of individuals with a view to dictating terms to short-sellers and earning more profits (Prohibited)

Speculative transactions

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Rigging the marketCreating an artificial condition in the

market, whereby the market value of a particular security is pushed up.

Margin TradingMargin Trading is carried on by the clients with funds borrowed from their brokers. It a popular method of speculative Trading. The client also agrees to maintain a minimum margin of amount in his account.

Speculative transactions

SCREEN SHOT OF A TRADING ACCOUNT & BANK NIFTY WATCH

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Players in the Stock Market or Market Participants

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Market participants include: Individual retail investors, Institutional investors such as mutual

funds, banks, insurance companies and hedge funds,

Publicly traded corporations trading in their own shares.

Institutional Investor vs. Retail Investor

Institutional investor

An institutional investor is an investor, such as a bank, insurance company, retirement fund, hedge fund, or mutual fund, that is financially sophisticated and makes large investments, often held in very large portfolios of investments. Because of their sophistication, institutional investors may often participate in private placements of securities, in which certain aspects of the securities laws may be inapplicable.

Retail investorA retail investor is an individual investor possessing shares of a given security. Retail investors can be further divided into two categories of share ownership. A Beneficial Shareholder is a retail

investor who holds shares of their securities in the account of a bank or broker, also known as “in Street Name.” The broker is in possession of the securities on behalf of the underlying shareholder.

A Registered Shareholder is a retail investor who holds shares of their securities directly through the issuer or its transfer agent. Many registered shareholders have physical copies of their stock certificates.

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Defects of Indian Stock Market/Capital Market

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Absence of Genuine investors

Presence of Price Rigging

Prevalence of Insider Trading

Lack of Liquidity

Scarcity of Floating Securities

Lack of transparency

Poor response of Indian Household

Defects of Indian Stock Market/Capital Market

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Cumbersome procedures of Settlement

Problem of Odd Lots

Dominance of Financial Institutions

Lack of Professionalism

Dominance of Public Sector

Unhealthy competition of merchant Bankers

Other Defects

REFORMS IN STOCK MARKET OR RECENT DEVELOPMENTS

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Regulation of Intermediaries

Change in the Management Structure

Insistence of Quality Services

Prohibition of Insider Trading

Transparency of Accounting Practices

Strict Supervision of Stock Market Operations

Prevention Price Rigging

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Protection of Investors Interest

Setting up of Credit Rating Agencies

Introduction to Electronic Trading

Establishment of OTCEI/NSE

Introduction to Depository System

Trading in Derivatives

REFORMS IN STOCK MARKET OR RECENT DEVELOPMENTS

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Introduction42

The National Stock Exchange (NSE) is India's leading stock exchange covering various cities and towns across the country.

NSE was set up by leading institutions to provide a modern, fully automated screen-based trading system with national reach.

The National Stock Exchange (NSE) is a stock exchange located in Mumbai, India.

It is the 11th largest stock exchange in the world by market capitalization and largest in India by daily turnover and number of trades, for both equities and derivative trading.

The NSE's key index is the S&P CNX Nifty, known as the NSE NIFTY (National Stock Exchange Fifty), an index of fifty major stocks weighted by market capitalization.

Organization43

NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country.

The National Stock Exchange (NSE) operates a nation-wide, electronic market, offering trading in Capital Market, Derivatives Market and Currency Derivatives segments including equities, equities based derivatives, Currency futures and options, equity based ETFs, Gold ETF and Retail Government Securities. Today NSE network stretches to more than 1,500 locations in the country and supports more than 2, 30,000 terminals.

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FUNCTIONS

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Establishing nationwide trading facilities for all types of securities.

Ensuring equal access to investors all-over the country through an appropriate

communication network.

Meeting international benchmarks and standards.

Enabling shorter settlement cycles and book entry settlements

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Products47

Equities Equities Indices Mutual Funds Exchange Traded Funds Initial Public Offerings Security Lending and Borrowing Scheme Derivatives Equity Derivatives Currency Derivatives Interest Rate Futures Debt Retail Debt Market Wholesale Debt Market Corporate Bonds

Method of Trading in Stock Exchange48

Locating a Broker

Placement of Order• At best order• Limit order• Stop loss order

Execution of Order

Preparation of Contract

Notes

Settlement of Transactions

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National Exchange for Automated Trading (NEAT)

Bombay Online Trading (BOLT)

OVER THE COUNTER EXCHANGE OF INDIA (OTCEI)

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Introduction51

OTCEI was incorporated in 1990 under the Companies Act 1956 and is recognized as a stock exchange under Section 4 of the Securities Contracts Regulation Act, 1956. The Exchange was set up to aid enterprising promoters in raising finance for new projects in a cost effective manner and to provide investors with a transparent & efficient mode of trading.

Modeled along the lines of the NASDAQ market of USA, OTCEI introduced many novel concepts to the Indian capital markets such as screen-based nationwide trading, sponsorship of companies, market making and scripless trading.

Mission Statement of OTCEI52

Promoters of OTCEI53

OTCEI is promoted by : Unit Trust of India (UTI) Industrial Credit and Investment

Corporation of India(ICICI) Industrial Development Bank of India(IDBI) Industrial Finance Corporation of India(IFCI) and others and is a recognized stock exchange under the SCR Act.

Some Facts about OTCEI54

OTCEI... is the first screen based nationwide stock exchange in India

Is the first exchange to introduce Market Making in India Is the first exchange to introduce Sponsorship of

companies in India Is the only exchange to allow listing of companies with

paid-up below Rs.3 crores Is the only exchange to allow companies with less than

3 year track record to tap capital market has shifted trading from counter receipts to share

certificates has introduced Weekly Settlement Cycle allows short selling allows demat trading through NSDL has tied-up with NSCCL for Clearing

Need for OTCEI?55

Studies by NASSCOM, Software Technology Parks of India, the venture capital funds and the government's IT Task Force, as well as the rising interest in information technology, pharmaceutical, biotechnology and media shares have repeatedly emphasized the need for a national stock market for innovative and high growth companies.

The key issue for these companies is raising timely, cost effective and long term capital to sustain their operations and enhance growth. Such companies, particularly those that have been in operation for a short time, are unable to raise funds through the traditional financing methods, because they have not yet been evaluated by the financial world.

Who would find OTCEI helpful..?

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high-technology enterprises companies with high growth potential companies focused on new product development . entrepreneurs seeking finance for specific

business projects OTCEI, with its entry guidelines and eligibility requirements tailored for such innovative and growth oriented companies, is ideally positioned as the preferred route for raising funds through Initial Public Offer (IPOs) or primary issues, in this country.

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1. A company should have a minimum paid-up capital of Rs. 30 lakhs and the minimum offer to the public should be 25% of the issued capital or Rs. 20 lakhs worth of shares in face value, whichever is higher. SEBI Guidelines on Disclosure and Investor Protection will be applicable to all OTCEI issues.

2. Every company that intends to get listed has to be sponsored by a merchant banker ( Member/ Sponsor) of the Exchange. The Sponsor of the issue must arrange for Market Makers to give Buy & Sell quotes in the securities for an initial period of 18 months

3. Relaxation in Listing norms as compared to other stock exchanges

Participants in the OTCEI Market

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Members & dealers appointed by OTCEI

Companies, whose securities are listed on OTCEI

Investors who trade in the OTCEI

Registrar- who keeps custody of share certificates and maintains the registers

Settlement BankSEBI & GOVT which exercises an overall supervision & control

Who is a Sponsor ….?59

A Sponsor is a financial intermediary duly registered on OTC as a Sponsor and is normally a SEBI registered Merchant Banker.

He helps a company, desirous of coming out with a Public Issue, to raise funds while complying with all the regulatory requirements. The sponsor guides the company through the various legal requirements and accounting processes.

Appointment of a sponsor by a prospective issuer is mandatory for all OTCEI IPOs.

Currently there are 117 sponsors registered with OTC Exchange of whom more than 75 continue to hold SEBI registration as Merchant Bankers.

The services of the sponsor would complement the advice and consultation that the companies would receive from their professional investment bankers, law and accounting firm.

Thank you

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